The domestic economy is likely to take a hit in 2017 due to the lag effect of demonetisation, and the equity market is likely to sing a similar tone.Kshitij Anand | ETMarkets.com | December 20, 2016, 13:25 IST

NEW DELHI: It was a roller-coaster ride for equity investors all through the year gone by, as the benchmark indices came off after hitting fresh 52-week highs earlier in the year, weighed down by both local as well as global factors.

Calendar 2016 failed to cheer market participants as the benchmark indices gave up most of the gains made during the year. But that did not make investors wary of mutual funds (MFs), which pumped in over Rs 13,000 crore into the domestic equity market in November alone. The overall asset under management (AUM) of the industry crossed Rs 16 lakh crore.

Fundamentally, the domestic equity market is on a strong footing and investors with a long-term view have little to worry about. But short-term pain is inevitable, given the shaky nature of global and local factors dominating the market.

The domestic economy is likely to take a hit in 2017 due to the lag effect of demonetisation, and the equity market is likely to sing a similar tone. Most economists and analysts have slashed their growth targets for the economy as well as the benchmark Sensex.

So what really spoilt the party on Dalal Street in 2016? We looked at the top ten events that rocked the market during the year.

Demonetisation has been the boldest reform of this government, which has the potential to bring long-term structural benefits to the economy, while causing pain in the short term due to a cash crunch.

“We expect demonetisation to benefit the economy in multiple ways, like higher tax revenues that may lead to an increase in public expenditure and help the government pass on the benefits in the form of lower direct and indirect taxes,” Vaibhav Agrawal, Head of Research & ARQ, Angel Broking, told ETMarkets.com.

Demand in the consumer sector and sectors associated with it are likely to take a hit in the near term, but once the cash situation normalises, demand should bounce back, experts said.

Surgical strike on PoK: Sept 29

The domestic equity market went into a tailspin after the Director General of Military Operations said that Indian Army carried out surgical strikes on terror launch pads in Pakistani soil. Analysts feared that a series of such strikes in near future could rekindle tensions between the both nations, roiling markets.

Some analysts on D-Street were factoring in a 10 per cent fall if the geopolitical tensions between the two nations were to escalate. However, Pakistan dismissed India's claim of ‘surgical strike’ as an illusion, and termed the incident as ‘cross-border fire’.

Republican Donald Trump surprised experts by beating Democrat Hillary Clinton in the US presidential election, which gave way to ‘Trumponomics’. The word ‘Trumponomics’ refers to the bold economic plans such as cuts in personal and corporate taxes and restructuring of bilateral trade deals, as well as protectionism that can not only impact the US but economies across the world, including India.

Trump built his election campaign around the ideas of promoting domestic manufacturing and improving American infrastructure. He wants to improve labour force participation to improve economic growth.

“Due to these reasons, we can expect significantly higher government spending. Trump’s efforts to focus on improving domestic manufacturing is unlikely to impact Indian equities majorly,” said Agrawal of Angel Broking.

Trump's election as next US President is likely to create opportunities for Indian generic drugmakers, some analysts said.

“As a part of his seven-point healthcare agenda, Trump plans to allow consumers access to better drugs made abroad. The Trump regime will usher in new opportunities for Indian companies,” he said.

All clear to GST: Aug 3

The Rajya Sabha passed the Constitutional Amendment Bill on goods and services tax (GST) on August 3 a year after it received the approval of the Lok Sabha. This triggered a surge in the equity market and strengthened the case for the so-called ‘India story’.

GST, which is considered as a game-changing reform for the economy, is scheduled to get implemented by April 2017. Rough estimates suggest that it could add up to 2 ppt to India’s GDP growth.

However, the Goods and Services Tax Council failed to break the logjam on the crucial issue of division of tax administration between Central and state authorities.

“While the compensation logic between state and centre was seen as one of the last of the contentious issues for GST, the demonetisation drive may cast some shadows on the roll out deadline of April 2017,” Anand James, Chief Market Strategist, Geojit BNP Paribas told ETMarkets.com. Either way, there is no doubt that their successes is intertwined and are not mutually exclusive,” he said.

Britain voted to exit the EU with the 'Leave' camp winning with 51.9 per cent votes in a historic referendum, which was followed by the resignation of David Cameron as Prime Minister.

It may take years of negotiations for the UK to disentangle from the EU law, finance, trade, foreign policy, say experts. The immediate impact was felt across currency markets with major equity indices losing 2-10 per cent.

“If Brexit is a precursor to a tectonic shift in the euro zone, it could eventually disintegrate the entire European Union. Then, it may impact us in the short term,” Jimeet Modi, CEO, SAMCO Securities told ETMarkets.com.

“But in the long run, it will help India attain prominence in the global landscape, as we would emerge as a safe haven in such times of turmoil, attracting global funds,” he said.

Fed rate hike: Dec 14

On the expected lines, the US Federal Reserve raised interest rates by 25 bps to between 0.50 per cent and 0.75 per cent, its second such hike since last December, and forecast a steeper path for borrowing costs in 2017.

The Fed's median outlook for rates rose to three quarter point increases in 2017 from two as of September, which would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run ‘"normal’ 3.0 per cent, analysts say.

The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate, said the FOMC statement.

Rexit: June 18

In a surprising move on June 18, Raghuram Rajan said he would step down as the Governor of the Reserve Bank of India on September 4 at the end of his three-year term. Rajan was under attack from BJP MP Subramanian Swamy for his inflation-centric monetary policy.

In response to Rajan’s resignation, the government named his deputy Urjit Patel as his successor, an appointment hailed as a vote for continuity.

After taking over in September 2013, Rajan raised the short- term lending rate from 7.25 per cent to 8 per cent. The governor kept interest rates high throughout 2014, but began the process of rate easing in January 2015.

Rupee at new low: Nov 24

The rupee collapsed to a fresh life-time low of 68.86 against the dollar amid sustained foreign capital outflows. Foreign portfolio investors retreated from emerging markets like India towards US dollar on hopes of protectionist measures by President-elect Donald Trump.

Expectations that Trump will adopt an expansionary fiscal measure lifted US bond yields and fuelled a rally in the US dollar. This has prompted FPIs to offload some of their holdings in India market.

India-Mauritius Tax Treaty: May 11

India and Mauritius signed the protocol amending the agreement for avoidance of double taxation with Mauritius which is the biggest source of foreign direct investment and portfolio investment into India.

The island nation accounts for over 34 per cent of FDI in India while Singapore contributes 16 per cent. Earlier, the bilateral tax treaty exempted fund flows from capital gains tax.

For the benefit of investors, the protocol provides for grandfathering of investments as the new regime will apply to shares acquired on or after April 1, 2017. There will be a transition period from April 1, 2017, to March 31, 2019, during which capital gains will be taxed at half the domestic rate.

Oil prices rose to a level last seen in July 2016 as markets digested a landmark pact between oil producing countries. Global benchmark Brent crude briefly rose above $57 a barrel for the first time since July 2015.

Rising crude prices are making market participants worried about the possible impact of rising crude oil prices on Indian markets, the economy as well as various sectors which use crude as a raw material.

The year 2017 looks bullish for oil prices as the oil surplus market is likely to turn into a deficit, suggest experts. A steady rise in oil prices could well hurt India's current account deficit. The oil imports account for almost 80 per cent of India's import bill.

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